‘Fiduciary management' is now one of the most in demand services for UK defined benefit pension schemes. Having come to the UK almost a decade ago it is arguably one most radical changes that has taken place in the UK market in recent times. Fiduciary management is a growing and increasingly important service that can be seen a cross-over between investment consultancy and asset management. Currently, about 1 in 6 UK final salary schemes employ a fiduciary manager, but by 2025 this could have trebled.
Also known as OCIO (outsourced chief investment officer), delegated or implemented consulting, fiduciary management has been available in the UK for over a decade. In that time, it has become established as an effective solution for managing the complex investment challenges that the trustees responsible for pension schemes face.
It allows trustees to bring greater focus, time and expertise to their investment decision making. It allows access to deeper asset management capability and risk management functions. Trustees can access a broader range of investment opportunities and make sure all investments are appropriate for their overall liability profile. Trustees can then dedicate their investment time to strategy and other aspects, such as liability management exercises.
According to a survey of the market by KPMG, around 15% of UK-based defined benefit pensions use a fiduciary manager in some form or other.
Moreover, fiduciary management is becoming more popular. Growth is now above 20% a year and we expect this will continue. By 2025, it's possible that up to a half of all remaining DB schemes will make use of a fiduciary manager. This is because many pension funds are maturing and the time to make up any deficit is getting shorter. As schemes mature the need for excellent risk management increases.
This means that it is ever more important for trustees to control risks appropriately so that they can continue to deliver on the financial expectations of the scheme members.
Fiduciary management has been in the spotlight recently. In part, this has been driven by regulatory concerns as the UK's Competition & Markets Authority (CMA) had about the lack of competition in the sector. They have been exploring several remedies, including mandatory tendering. This includes where the mandate did not tender the first time round.
With the CMA's review coming to an end, we are moving into the third phase within the sector: greater regulation and more competition. This is likely to see a further shake-up for the sector as it presents new entrants with an opportunity to innovate.
Broadly, pension schemes fall into two categories. First, those that are underfunded. They need to accrue enough money in the remaining time available, but in a way that manages the risks of doing so in a very controlled manner.
Other schemes are closer to self-sufficiency - they are more fully funded, and they need to generate income to meet their liabilities (i.e., to pay members their pensions) but with equally careful risk control.
Both ends of the spectrum have a limited time horizon as these schemes are now closed with just a few market cycles left in which to achieve their needs.
For those schemes in the underfunded category, their asset allocation will be the key driver of risk and return. For those that are self-sufficient, the ability to source income and construct cashflow focused solutions in a risk aware way will be key.
These characteristics are the essence on which fund management is built. As such, asset managers should be well placed to deliver fiduciary solutions. Because of the need to build investment solutions from across the entire market spectrum - public and private - in truth, not all asset managers will be able to compete in this space.
Sion Cole, BlackRock's managing director, OCIO UK